Problems of subsidy

It is evident that the provision of subsidy in the budget will not be enough to take care of ever increasing volume of subsidy. It is estimated that an additional amount of Tk 270 billion would be needed during the current financial year. The government is finding it difficult to mobilise this amount of money. Flow of funds from the donors is not increasing. The government is going for additional borrowing from the banking system and simultaneously increasing the prices of fuel and electricity. The burden of subsidy is ultimately borne by the common people directly and via price increase of commodities. In the current fiscal year, the amount of subsidy was proposed to be Tk 204.77 billion. But recent estimates show that this amount could be in the neighbourhood of Tk 473.85 billion. The earlier estimate of subsidy for the Bangladesh Petroleum Corporation (BPC) was set at Tk 30 billion. This has now gone up to Tk 280.18 billion. Although subsidy for agriculture (fertiliser, diesel and electricity) was estimated at Tk 45 billion, the revised estimate comes to Tk 66.77 billion. Subsidy on food is Tk 17.36 billion, while Power Development Board (PDB) would need Tk 52 billion. Export subsidy is projected at Tk 22 billion. The Bangladesh jute Mills Corporation (BJMC) and other sectors account for Tk 34 billion. Total subsidy at the moment accounts for 29 per cent of the national budget as against the estimate of 12 per cent. There is a constant pressure from the donors to keep subsidy under control. The government has also been trying best to reduce its amount. Fuel prices have been increased and electricity tariff enhanced for doing so. These actions are badly impacting the people. The increase in the price of CNG has adversely affected the middle and lower class people. Cost of living, inflation and increase in the cost of public transport have created pressure at individual level. Global financial instability is also impacting the domestic economy. Prices of petroleum products have been increased three times in six months. Another round of price increase is expected soon in respect of electricity and CNG. Excessive subsidy has created pressure on the economy. Export sector may suffer from negative impact of second recession in the developed countries. Because of the rise in cost of living with no corresponding increase of income, many people are going below the poverty line. Rise in the price of petroleum products at this time of high prices of essentials will make the lives of common people more difficult. Production cost of electricity will also increase because of increase in fuel prices. Export sector registered negative growth in the second month of the current financial year. The government has adopted the strategy of reducing subsidy by increasing the prices of petroleum products several times. Point to point inflation now stands at 11.29 per cent. Instead of going for medium term power projects, the government has opted for liquid fuel oil dependent rental and quick rental power plants in order to increase power supply and eliminate load-shedding. These power plants were, however, set up without tender. PDB is buying electricity at a high cost of Tk 1013 per unit from these plants and selling the same at Tk 45 per unit to the consumers. Therefore, losses of PDB are multiplying. The price differential is to be met by subsidy. Huge amount of petroleum products are imported for the rental power plants causing balance of payment problem. The amount of subsidy for BPC has gone up to Tk 280 billion as mentioned earlier. It will be difficult to manage this amount. The consumers cannot afford to bear the full burden of subsidy. A joint venture company of India has quoted a price of Tk 14 per unit for coal based power plant. Power sector officials are reported to have expressed surprise at this proposal. Local companies have offered to supply electricity at Tk 4 per unit from coal based power plants. India will also not supply coal for this project. PDB will have to arrange coal for the project. In all fairness, India should supply coal as their input for the project as they have large coal fields. The government will have to find out resources for meeting the burden of subsidy. It is not possible to meet this from revenue budget. The government is, therefore, borrowing from banks which ultimately results in high inflation. Raising prices of petroleum products is also a strategy of the government. To feed the rental power plants, the country's fuel imports have doubled. This is putting pressure on the balance of payments. The government subsidy has increased in the last three years due to its short term policy of setting up petroleum based rental power plants. Experts have urged the government to fast track the coal policy, instead of relying too much on costly rental power to ensure energy security. Some support open-pit mining as an option. There was no point going for underground mining as the method produces only up to 20 per cent of proven coal reserve as against 90 per cent under open pit operation. Bangladesh is failing to reach a decision due to resistance from a small group of people. The government should draw up a befitting programme to settle people to be affected by open pit mining. Using coal will reduce dependence on rental power plants which are responsible for huge subsidy. Despite having enormous local coal reserves of around 3.0 billion tonnes in five coal mines, the government has decided to run all the coal fired power plants with imported coal posing big threat to foreign currency reserve and balance of payment. The power ministry has a mega plan to generate over 10,000 mw of electricity from the planned coal based power plants by 2021 under its master plan. The country will require over 50,000 tonnes of coal per day for electricity generation from coal based power plants by 2015 and requirement will double by 2021. Can the country handle it? The writer is an economist and columnist. He can be reached at email: syedjamaluddin22@yahoo.com